Essentials Of Economics 4th Edition R Glenn Hubbard, Anne M Garnett, Philip Lewis, Anthony O Brien - Solutions

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Suppose the federal government increases spending without also increasing taxes. In the short run, how will this action affect real GDP and the price level in a closed economy? How will the effects of this action differ in an open economy?
Suppose that interest rates in Australia rise relative to those in other countries. a How will this policy affect real GDP in the short run if Australia is a closed economy? b How will this policy affect real GDP in the short run if Australia is an open economy? c How will your answer to part b
An article in The Economist magazine described Ireland as ‘an extraordinarily open economy’ (The Economist, 2011).5 Is fiscal policy in Ireland likely to be more or less effective than it would be in a less open economy? Briefly explain.
Why does fiscal policy have a smaller effect on aggregate demand in an open economy than in a closed economy? PROBLEMS AND APPLICATIONS
Why does monetary policy have a greater effect on aggregate demand in an open economy than in a closed economy?
Australia’s net foreign debt has been rising as a proportion of GDP over time. What are the potential advantages and disadvantages of rising foreign debt for Australia? Would your analysis of external debt for Australia apply to very poor developing countries?
In 2010, China introduced some further flexibility into its exchange rate determination and allowed the value of the yuan to appreciate somewhat. According to a news article at the time: Economists at China International Capital Corp., or CICC, say the companies that will suffer the most from a
An investment analyst recommended that investors ‘gravitate toward the stronger currencies and countries that are running current-account and fiscal surpluses’, such as South Korea and Taiwan (Lim, 2015).3 a Holding all other factors constant, would we expect a country that is running a
If investment spending in Australia has been strong, why would this reduce apprehension about the size of the current account deficit? What does the current account deficit have to do with investment spending?
What factors should be considered when determining whether or not foreign debt is a problem for a country? Do you think Australia’s foreign debt is a problem?
What is the twin deficits hypothesis?
What happens to national saving when the government runs a budget surplus?
Suppose a politician proposes that tariffs be imposed on imports from countries with which Australia has a trade deficit. If this proposal were enacted and if it were to succeed in reducing Australia’s current account deficit to zero, what would be the likely effect on domestic investment
Use the saving and investment equation to explain why Australia experienced large current account deficits in the mid-2000s.
Look again at how we arrived at the equation S = I + NX + NPY. Suppose that we define national income as being equal to Y + TR, where TR equals government transfer payments, and we define government spending as being equal to G + TR. Show that after making these adjustments, we end up with the same
Briefly explain whether you agree with the following statement: ‘Because in 2016 national saving was a smaller percentage of GDP in the United Kingdom than in Australia, domestic investment must also have been a smaller percentage of GDP in the United Kingdom than in Australia.’
In 2015, France’s net foreign investment was negative. Which was larger in France in 2015: national saving or domestic investment? Briefly explain.
In 2014, domestic investment in Japan was 21.7 per cent of GDP, and Japanese national saving was 22.4 per cent of GDP. What percentage of GDP was Japanese net foreign investment?
If a country saves more than it invests domestically, what must be true of its net foreign investment?
What is the saving and investment equation? If national saving declines, what will happen to domestic investment and net foreign investment?
Explain the relationship between the current account deficit and net foreign investment.
[Related to Making the connection 20.3] An economist in Spain noted that the Spanish economy was in recession during the early 1990s, but that ‘in 1992 and 1993 a series of [exchange rate] devaluations got us out of trouble’ (The Economist, 2009).2 Was Spain able to use exchange rate
[Related to Making the connection 20.3] The United Kingdom decided not to join other European Union countries in using the euro as its currency. Opponents of adopting the euro argued that it is not possible to manage the entire economy of Europe with just one interest rate policy. For instance, how
[Related to Making the connection 20.2] Assume that the Big Mac is selling for $5.04 in the United States. Calculate the implied exchange rate between each of the currencies in the following table relative to the US dollar, and explain whether each currency is overvalued or undervalued in terms of
According to the theory of purchasing power parity, if the inflation rate in Australia is higher than the inflation rate in New Zealand, what should happen to the exchange rate between the Australian dollar and the New Zealand dollar? Briefly explain.
The Australian dollar appreciated significantly against the US dollar and some other currencies between 2010 and early 2012 and remained relatively strong for some years after. Discuss which consumers and industries benefited, and which ones were disadvantaged by the appreciation.
Following the floating of the Australian dollar in 1983, the trade-weighted index of the Australian dollar fell substantially. Does this indicate that the Australian dollar was overvalued or undervalued? Explain your answer. 4.6 Consider this statement: ‘It usually takes around 100 yen to buy one
Consider the following: An Australian manufacturing representative said that weak currencies overseas, particularly in Europe and Asia, had dragged down its sales 2 per cent worldwide, ultimately costing it $35 million in net income. What is meant by a ‘weak currency’? Why would weak currencies
Why did many European countries agree to replace their previous currency with the euro?
Briefly describe the four determinants of exchange rates in the long run.
What is the theory of purchasing power parity? Does it give a complete explanation for movements in exchange rates in the long run? Briefly explain.
After World War II, why might countries have preferred the Bretton Woods System to re-establishing the gold standard? In your answer, be sure to note the important ways in which the Bretton Woods System differed from the gold standard.
If a country is using the gold standard, what is likely to happen to the country’s money supply if new gold deposits are discovered in the country? Is this change in the money supply desirable? Briefly explain.
Australia and most other countries abandoned the gold standard during the 1930s. Why would the 1930s have been a particularly difficult time for countries to have remained on the gold standard?
Briefly explain whether you agree with the following statement: ‘The RBA is limited in its ability to issue paper currency by the amount of gold reserves it holds. To issue more paper currency, the RBA first has to buy more gold.’
What does it mean when one currency is ‘pegged’ against another currency?
What is the difference between a fixed exchange rate system and a managed float exchange rate system?
In 2010, when the Australian dollar hit US$1.00, and exceeded this in 2011 and 2012, manufacturers, farmers, tourist operators and educational institutions expressed the view that if the exchange rate did not improve, it would be difficult for their businesses to compete with overseas producers.
[Related to Solved problem 20.2] When a country’s currency appreciates, is this generally good news or bad news for the country’s consumers? Is it generally good news or bad news for the country’s businesses? Explain your reasoning.
Use the graph to answer the following questions.a Briefly explain whether the dollar appreciated or depreciated against the yen. b Which of the following events could have caused the shift in demand shown in the graph?i Interest rates in Australia declined relative to those in other countries. ii
Some exporting firms have argued that the Chinese government has been keeping the value of the Chinese yuan artificially low against other currencies, which gives Chinese exporters an advantage when selling their products overseas. Why would a low value of the yuan in exchange for other currencies
Graph the demand for and supply of Australian dollars for euros and label each axis. Show graphically and explain the effect of an increase in Australian government budget deficits that increase Australian interest rates on the demand for and supply of dollars and the resulting change in the
Graph the demand for and supply of Australian dollars for euros and label each axis. Show graphically and explain the effect of an increase in interest rates in Europe by the European Central Bank (ECB) on the demand for and supply of dollars and the resulting change in the exchange rate of euros
[Related to Don’t let this happen to you on page 678] If we know the exchange rate between country A’s currency and country B’s currency, and we know the exchange rate between country B’s currency and country C’s currency, then we can calculate the exchange rate between country A’s
What are the three main sets of factors that cause the supply and demand curves in the foreign exchange market to shift? PROBLEMS AND APPLICATIONS
Why do foreign households and foreign firms demand Australian dollars in exchange for foreign currency? Why do Australian households and firms supply Australian dollars in exchange for foreign currency?
Suppose that the current exchange rate between the Australian dollar and the euro is 0.6 euros per dollar. If the exchange rate changes to 0.8 euros per dollar, did the euro appreciate or depreciate against the dollar?
If the exchange rate between the Japanese yen and the Australian dollar expressed in terms of yen per dollar is ¥110 = $1, what is the exchange rate when expressed in terms of dollars per yen?
A news article refers to ‘debt-strapped emerging markets already struggling with current-account deficits’ (Trivedi, 2015).1 Why might we expect that countries running current account deficits might also have substantial foreign debts?
According to this chapter, the Australian trade deficit is almost always smaller than the Australian current account deficit. Why is this true?
[Related to Solved problem 20.1] Australia runs a current account deficit every year. What must be true about Australia’s financial account balance?
[Related to Solved problem 20.1] Suppose we know that a country has been receiving large inflows of foreign investment. What can we say about its current account balance?
[Related to Solved problem 20.1] Is it possible for a country to run a trade deficit and a financial account deficit simultaneously? Briefly explain.
[Related to Don’t let this happen to you, on page 675] In 2014, Germany had a surplus in the balance of trade in goods and services of 217 billion euros. Which was larger in that year: Germany’s exports of goods and services or its imports of goods and services? In 2014, Germany had a current
Use the information in the following table to prepare a balance of payments account like the one shown in Table 20.1. Assume the balance on the capital account is zero. All values are in billions of dollars. Increase in foreign holdings of assets $1181 Exports of goods 856 Imports of services
In 2014, France had a current account deficit of close to 19.5 billion euros. Did France experience a net capital outflow or a net capital inflow in 2014? Briefly explain.
Explain whether you agree or disagree with the following statement: ‘Australia has run a balance of payments deficit every year since 1974.
What is the difference between net exports and the current account balance?
What is the relationship between the current account, the capital account, the financial account and the balance of payments?
A common argument against free trade is that it causes a loss of domestic production and jobs. If a country engages in free trade, is the total number of jobs in the country likely to decline? Briefly explain.
Suppose you are explaining the benefits of free trade and someone states, ‘I don’t understand all the principles of comparative advantage and gains from trade. I just know that if I buy something produced in Australia, I create a job for an Australian, and if I buy something produced in China,
During the Global Financial Crisis of 2007–2008, the US government included a ‘Buy American’ condition as part of its stimulus package to US firms, requiring firms to purchase production inputs from other US companies. Do you think this policy saved jobs and helped the US economy recover from
Some politicians have suggested that the WTO work towards making certain labour standards part of every trade agreement, with sanctions imposed on countries that do not meet these labour standards. However, developing countries—which comprise more than 100 of the WTO member countries—have
What is protectionism? Who benefits and who loses from protectionist policies? What are the main arguments people use to justify protectionism?
What is globalisation? Why are some people opposed to globalisation?
What is the purpose of the World Trade Organization, and has it achieved its goals?
[Related to Solved problem 19.2] Australia currently grows cherries and imports them. Assume that the Australian government decides to restrict international trade in cherries by imposing a quota that allows imports of only 600000 tonnes of cherries into Australia each year. The following figure
Do you think many Australians associate free trade with job losses rather than opportunities and a higher standard of living?
A student makes the following argument: ‘Tariffs on imports of foreign goods into Australia will cause the foreign companies to add the amount of the tariff to the prices they charge Australians for those goods. Instead of putting a tariff on imported goods, we should ban importing them. Banning
The United States has about 9000 rice farmers and these farmers receive subsidy payments from the US government of around US$90 000 per farmer. These payments result in US farmers producing much more rice than they otherwise would, a substantial amount of which is exported. According to an article
Australia produces oranges and also imports oranges from other countries. a Draw a graph showing the supply and demand for oranges in Australia. Assume that Australia can import as much as it wants at the world price of oranges without causing the world price of oranges to increase. Make sure you
A commentator claimed that the case for free international trade was only relevant if all countries adopted free trade. Do you agree that a country benefits from free trade only if every other country also practises free trade? Briefly explain.
The European Union is an organisation of many European countries. Almost 40 per cent of the entire EU budget (around 50 billion euros) consists of protection and subsidies to EU farmers. These payments result in European farmers producing much more food than they otherwise would. A substantial
[Related to the opening case] Which industries have been affected unfavourably by the tariff on imported motor vehicles in Australia?
Who gains and who loses when a country imposes a tariff or a quota on imports of a good?
What is a tariff? What is a quota? Give an example of a non-tariff barrier to trade.
Explain why there are advantages to a movie studio operating on the Gold Coast, Queensland, rather than in, say, Hobart, Tasmania.
[Related to Don’t let this happen to you] Explain whether you agree or disagree with the following statement: ‘I can’t believe that anyone opposes expanding international trade. After all, when international trade expands, everyone wins.’
Is free trade likely to benefit a large populous country more than a small country with fewer people? Briefly explain.
Briefly explain whether you agree or disagree with the following statement: ‘Most countries exhaust their comparative advantage in producing a good or service before they reach complete specialisation.’
[Related to Solved problem 19.1] A political commentator makes the following statement: The idea that international trade should be based on the comparative advantage of each country is fine for rich countries like the United Kingdom, Australia, the United States and Japan. Rich countries have
[Related to Solved problem 19.1] The following table shows the hourly output per worker in two industries in Chile and Argentina. a Explain which country has an absolute advantage in the production of hats and which country has an absolute advantage in the production of beer. b Explain which
Does everyone gain from international trade? If not, explain which groups lose.
What are the main sources of comparative advantage?
What is meant by a country specialising in the production of a good? Is it typical for countries to be completely specialised? Briefly explain.
Briefly explain how international trade increases a country’s consumption.
Using the numbers in the following table, explain which country has a comparative advantage in producing smartwatches. OUTPUT PER HOUR OF WORK SMARTWATCHES FITNESS TRACKERS Switzerland Canada 8 5 10 3
The following table shows the hourly output per worker for Greece and Italy measured as quarts of olive oil and pounds of pasta.Calculate the opportunity cost of producing olive oil and pasta in both Greece and Italy. Greece Italy OUTPUT PER HOUR OF WORK OLIVE OIL 4 PASTA 2 8
Briefly explain whether you agree with the following argument: ‘Unfortunately, Bolivia does not have a comparative advantage with respect to Australia in the production of any good or service.’ (Hint: You do not need any specific information about the economies of Bolivia or Australia to be
Suppose, on average, workers in the Chinese consumer white goods industry produce less output per hour than Australian workers producing the same goods. Despite this fact, China exports large quantities of white goods to Australia. Briefly explain how this is possible.
Why do the goods that countries import and export change over time? Use the concept of comparative advantage in your answer.
What makes the theory of comparative advantage such a powerful insight in economics?
What is the difference between absolute advantage and comparative advantage? Will a country always be an exporter of a good in which it has an absolute advantage in production?
Why might a smaller country, such as Singapore, be more likely to import and export larger fractions of its GDP than would a larger country, such as China or the United States?
Briefly explain whether you agree with the following statement: ‘Japan has always been much more heavily involved in international trade than most other nations. In fact, today Japan exports a larger fraction of its GDP than Germany, the United Kingdom or the United States.’
Briefly explain whether you agree or disagree with the following statement: ‘International trade is more important to the Australian economy than to most other economies.’5If Australia were to stop trading goods and services with other countries, which Australian industries would be likely to
Are imports and exports a smaller or larger fraction of Australia’s GDP than they were 50 years ago?
Briefly explain whether the value of Australian exports is typically larger or smaller than the value of Australian imports.
In macroeconomics in the 1960s and early 1970s, it was often taught that an economy could have higher unemployment in order to achieve lower inflation, or that higher inflation may be the result of policies aimed at achieving lower unemployment. Why might such views of the trade-off between
Briefly explain whether you agree with the following statement: ‘Any economic relationship that changes as economic policy changes is not a structural relationship.’

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Essentials Of Economics 4th Edition R Glenn Hubbard, Anne M Garnett, Philip Lewis, Anthony O Brien - Solutions

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